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Note 2 - Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners' Interests | 12 Months Ended
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Dec. 31, 2012
Noncontrolling Interest Disclosure [Text Block] |
2. | Acquisitions and Subsidiaries and Joint Ventures with Noncontrolling Owners’ Interests
In January 2012, RHB, a wholly owned subsidiary, assumed six construction contracts with $25.0 million of unearned revenues from Aggregate Industries―SWR, Inc. (“AI”), an unrelated third party. In addition, Aggregate South West Holdings, LLC (“ASWH”) and RHB Properties, LLC (“RHBP”), newly formed entities owned by Richard Buenting, the President and Chief Executive Officer of RHB, acquired construction related machinery and equipment and land with quarries from AI. AI entered into a two-year non-compete agreement with respect to Utah, Idaho and Montana as well as certain areas of Nevada. On April 27, 2012, RHB merged with ASWH and acquired RHBP. In exchange, RHB granted Mr. Buenting a 50% member interest in RHB. These transactions allowed RHB to expand its operations in Nevada. The Company also agreed with Mr. Buenting to amend and restate the operating agreement for RHB. The amended agreement provides that the Company is the Manager of RHB and retains full, exclusive and complete power, authority and discretion to manage, supervise, operate and control RHB; therefore, the Company consolidates RHB with its other subsidiaries. The Company also entered into a buy/sell and management agreement with Mr. Buenting. Under this agreement, the Company or Mr. Buenting may annually elect to make offers to buy the other owner’s 50% interest in RHB and sell their 50% interest in RHB at a price which they specify. Upon receipt of the offers, the other owner must elect either to sell their interest or purchase the interest from the owner making the offers. The agreement also requires that the Company acquire Mr. Buenting’s interest in the event of his termination without cause, death, or disability. To the extent that the redemption value under the buy/sell and management agreement exceeds the initial valuation of Mr. Buenting’s noncontrolling interest, the Company shall record an adjustment to retained earnings. In 2012, a pre-tax adjustment of $2.5 million was recorded. Under the agreement, the Company will provide RHB with access to a $5 million line of credit. These transactions were accounted for as a business combination. In December 2012, the Company finalized its valuation of the assets acquired, the membership interest granted and the tax related impact of the transaction. The purchase price for the transaction was $9.8 million for the assets acquired net of a contract liability. In addition, the Company recorded a credit of $233,000 to “Additional paid in capital” resulting from the excess of the post-merger member capital over the Company’s book value of the 50% investment in RHB issued to Mr. Buenting. As a result of the merger, an additional difference between the Company’s tax basis related to RHB and its book basis was created. Accordingly, the Company recorded an additional deferred tax liability of $360,000 with an offset to goodwill. Revenues and earnings related to the contracts assumed and the acquired companies for 2012 were $26.1 million and $152,000, respectively. In connection with this transaction, AI did not agree to provide us with historical information related to the earnings from the acquired operations except for information related to the specific contracts being assumed. Furthermore, we determined that such information was not needed in order to evaluate the transaction based on our knowledge of the assets acquired and the Nevada road and highway construction market. Therefore, we are not able to present pro forma financial information as if the transactions had occurred on January 1, 2011. In connection with the August 1, 2011, acquisition of J. Banicki Construction, Inc. (“JBC”) by 80% owned Ralph L. Wadsworth Construction Company, LLC (“RLW”), RLW agreed to additional purchase price payments of up to $5 million to be paid over a five-year period. The additional purchase price is in the form of an earn-out which is classified as a Level 3 fair value measurement. In making this valuation, the unobservable input consisted of forecasted earnings before interest, taxes and depreciation and amortization (“EBITDA”) for the periods after the period being reported on through July 31, 2016. The additional purchase price is calculated generally as 50% of the amount by which earnings before interest, taxes, depreciation and amortization (“EBITDA”) exceeds $2 million for each of the calendar years 2011 through 2015 and $1.2 million for the seven months ended July 31, 2016. The yearly excess forecasted EBITDA in our calculation ranged from 0% to 205% of the minimum EBITDA threshold for the years 2012 through 2016. The discounted present value of the additional purchase price was estimated to be $2.4 million as of August 1, 2011, the acquisition date, and $2.3 million as of December 31, 2012. The undiscounted earn-out liability as of December 31, 2012 is estimated at $2.4 million and could increase by $2.6 million if EBITDA during the earn-out period increases $5.2 million or more and could decrease by the full amount of the liability if EBITDA does not exceed the minimum threshold in any of the periods during the earn-out period. Any significant increase or decrease in actual EBITDA compared to the forecasted amounts would result in a significantly higher or lower fair value measurement of the additional purchase price. This liability is included in other long-term liabilities in the accompanying consolidated balance sheets. The following table summarizes the initial allocation of the purchase price for JBC (in thousands):
Assets acquired and liabilities assumed: |  |  |
Current assets, including cash of $4,662 |  | $ | 8,839 |
Current liabilities |  |  | (5,708 | )
Working capital acquired |  |  | 3,131 |
Property and equipment |  |  | 2,018 |
Other |  |  | 9 |
Total tangible net assets acquired at fair value |  |  | 5,158 |
Goodwill |  |  | 4,803 |
Total consideration |  |  | 9,961 |
Fair value of earn-out |  |  | (2,370 | )
Cash paid, net of $409 receivable from seller |  | $ | 7,591 |
The purchase price allocation has been finalized, and our analysis of the assets acquired indicates that there are no material separately identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax purposes over 15 years. Acquisition related costs of $328,000 are included in direct costs of acquisitions in the Company’s consolidated statements of operations for the twelve months ended December 31, 2011. The fair value of the financial assets acquired includes receivables with a fair value of $3.8 million, which are deemed fully collectible. On August 1, 2011, the Company purchased a 50% limited partner interest in Myers. Myers is a construction limited partnership located in California and was acquired in order to expand the geographic scope of the Company’s operations into California. The following table summarizes the initial allocation of the purchase price for Myers (in thousands):
Assets acquired and liabilities assumed: |  |  |
Current assets, including cash of $654 |  | $ | 3,207 |
Current liabilities |  |  | (2,464 | )
Working capital acquired |  |  | 743 |
Property and equipment |  |  | 708 |
Debt due to noncontrolling interest owner |  |  | (500 | )
Total tangible net assets acquired at fair value |  |  | 951 |
Goodwill |  |  | 1,502 |
Total consideration |  |  | 2,453 |
Fair value of noncontrolling owners’ interest in Myers |  |  | (1,226 | )
Cash paid |  | $ | 1,227 |
The fair value of the noncontrolling interests was determined based on the negotiated price at which the Company purchased its 50% interest which was based in part on expectations of future earnings. The purchase price allocation has been finalized, and our analysis of the assets acquired indicates that there are no material separately identifiable intangible assets. The goodwill attributable to the acquisition is deductible for tax purposes over 15 years. Acquisition related costs of $128,000 are included in direct costs of acquisitions in the Company’s consolidated statements of operations for the year ended December 31, 2011. The fair value of the financial assets acquired includes receivables with a fair value of $2.1 million, which are expected to be fully collectible. See Note 3 regarding the determination that Myers’ is a variable interest entity and the resulting impact on the consolidated financial statements. The following table shows the amounts of JBC’s and Myers’ revenues and earnings included in the Company’s consolidated statements of operations and cash flows for the year ended December 31, 2011, and the revenues and earnings of the combined entity had the acquisition dates been January 1, 2010 (in thousands):
|  | Revenues |  |  | Net Income (Loss) Attributable to Sterling Common Stockholders |
JBC actual from 8/1/2011 – 12/31/2011 |  | $ | 12,303 |  |  | $ | 245 |
Myers actual from 8/1/2011 – 12/31/2011 |  |  | 7,153 |  |  |  | 170 |
Supplemental pro forma results of the Company, JBC, and Myers on a combined basis for 1/1/2010 – 12/31/2010 (unaudited) |  |  | 475,906 |  |  |  | 19,596 |
In connection with the December 3, 2009 acquisition of RLW, the noncontrolling interest owners of RLW, who are related and also its executive management, had the right to require the Company to buy their remaining 20.0% interest in RLW in 2013, and concurrently, the Company had the right to require those owners to sell their 20.0% interest to the Company by July 2013 (the “RLW put/call”). The purchase price in each case was 20% of the product of the simple average of RLW’s EBITDA (income before interest, taxes, depreciation and amortization) for the calendar years 2010, 2011 and 2012 times a multiple of a minimum of 4 and a maximum of 4.5. The valuation of this purchase price was classified as a Level 3 fair value measurement. In making this valuation, the observable input was RLW’s EBITDA for the period from January 1, 2010 through December 31, 2012. The noncontrolling owners’ interests, including the obligation under the RLW put/call, were recorded at their estimated fair value at the date of acquisition as “Obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the accompanying consolidated balance sheets. Annual interest was accreted for the RLW put/call obligation based on the Company’s borrowing rate under its Credit Facility plus two percent. Such accretion amounted to $993,000, $881,000, and $807,000 for the years ended December 31, 2012, 2011 and 2010, respectively, and is recorded in “Interest expense” in the accompanying consolidated statement of operations. In addition, based on the estimated average of RLW’s EBITDA for the calendar years 2010, 2011 and 2012 and the expected multiple, the estimated fair value of the RLW put/call was increased by $3.8 million and $1.3 million during the years ended December 31, 2012 and 2011, respectively, and this change, net of tax of $1.3 million and $0.5 million, respectively, has been reported as a charge to retained earnings. Under an agreement with the noncontrolling interest owners of RLW, the Company purchased their 20% interest in RLW on December 31, 2012 subject to a final determination of RLW’s EBITDA for the period from January 1, 2010 through December 31, 2012. A payment of $23.1 million was made, and the Company expects to make a final additional payment of $568,000 in March 2013. This amount as well as any undistributed earnings to the noncontrolling interest owners for 2012 is included in current liabilities under “Current obligation for noncontrolling owners’ interests in subsidiaries and joint ventures” in the accompanying consolidated balance sheets. The following table summarizes the initial allocation of the purchase price for RLW (in thousands):
Assets acquired and liabilities assumed: |  |  |
Current assets, including cash of $3,370 |  | $ | 43,053 |
Current liabilities |  |  | (31,953 | )
Working capital acquired |  |  | 11,100 |
Property and equipment |  |  | 11,212 |
Total tangible net assets acquired at fair value |  |  | 22,312 |
Goodwill |  |  | 57,513 |
Total consideration |  |  | 79,825 |
Fair value of noncontrolling owners’ interests in RLW, including put |  |  | (15,965 | )
Cash paid |  | $ | 63,860 |
The goodwill attributable to the acquisition is deductible for tax purposes over 15 years. On October 31, 2007, the Company purchased a 91.67% interest in RHB. The noncontrolling interest owner of RHB had the right to put, or require the Company to buy, his remaining 8.33% interest in the subsidiary and, concurrently, the Company had the right to require that the owner sell his 8.33% interest to the Company, in 2011. On March 17, 2011, the right to put/call the RHB noncontrolling interest was extended to anytime between that date and December 31, 2012. In addition the price was increased from $7.1 million to $8.2 million which settled $1.1 million of accrued amounts due to the noncontrolling interest owner under the October 31, 2007 purchase agreement. In September 2011, the noncontrolling owner exercised his right to put his remaining interest of 8.33% in RHB to the Company for $8.2 million. This transaction was completed in December 2011 under the terms of the agreement. Changes in noncontrolling interests The following table summarizes the changes in the noncontrolling owners’ interests in subsidiaries and consolidated joint ventures for the years ended December 31, 2010 through 2012 (in thousands):
|  | Years Ended December 31, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Balance, beginning of period |  | $ | 18,375 |  |  | $ | 28,724 |  |  | $ | 23,887 |
Net income attributable to noncontrolling interest included in liabilities |  |  | 16,941 |  |  |  | 935 |  |  |  | 7,137 |
Net income attributable to noncontrolling interest included in equity |  |  | 1,068 |  |  |  | 261 |  |  |  | -- |
Accretion of interest on puts |  |  | 993 |  |  |  | 881 |  |  |  | 1,169 |
Change in fair value of RLW put/call |  |  | 3,797 |  |  |  | 1,268 |  |  |  | -- |
Change in fair value of RHB put/call |  |  | 2,473 |  |  |  | 1,054 |  |  |  | 691 |
Acquisition by Sterling of RHB noncontrolling interest |  |  | -- |  |  |  | (8,205 | ) |  |  | -- |
Noncontrolling interest associated with Myers acquisition |  |  | -- |  |  |  | 1,227 |  |  |  | -- |
Issuance of noncontrolling interest in RHB in exchange for net assets of acquired companies |  |  | 9,767 |  |  |  | -- |  |  |  | -- |
Distributions to noncontrolling interests owners |  |  | (10,185 | ) |  |  | (7,809 | ) |  |  | (4,160 | )
Acquisition by Sterling of RLW noncontrolling interest |  |  | (23,144 | ) |  |  | -- |  |  |  | -- |
Other |  |  | (39 | ) |  |  | 39 |  |  |  | -- |
Balance, end of period |  | $ | 20,046 |  |  | $ | 18,375 |  |  | $ | 28,724 |
Noncontrolling owners’ interest in earnings of subsidiaries and joint ventures for the year ended December 31, 2012 shown in the accompanying consolidated statement of operations of $18.0 million includes $15.0 million attributable to the RLW noncontrolling interest owners, which is reflected in “Current obligation for noncontrolling owners’ interests in subsidiaries and joint ventures,” $1.9 million attributable to RHB noncontrolling interest owners, which is reflected in “Obligation for noncontrolling owners’ interest in subsidiaries and joint ventures” and income of $1.1 million attributable to Myers’ noncontrolling interest owners which is reflected in equity in “Noncontrolling interests” in the accompanying consolidated balance sheet. In 2012, the Company agreed to amend RLW’s operating agreement effective January 1, 2012 to provide that any goodwill impairment, including the 2011 fourth quarter goodwill impairment of the Company described in Note 8 below is not to be allocated to RLW for the purpose of calculating the distributions to be made to the RLW noncontrolling interest holders. This amendment resulted in an increase in the net income attributable to RLW’s noncontrolling interests of $6.7 million during the year ended December 31, 2012. This increase is included in “Noncontrolling owners’ interests in earnings of subsidiaries and joint ventures” in the accompanying consolidated statement of operations. This increase has a related tax impacted of $2.4 million which increased the tax benefit for the period.

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